Difference between 60/40 and 40/60

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Difference between 60/40 and 40/60

Postby CV » Tue Oct 01, 2013 9:13 am

According to Vanguard's portfolio asset allocation tool, a 60/40 AA has had (in the past, and I know that doesn't mean much going forward) an average return of 8.7%, and a 40/60 AA has had an average return of 7.8% (50/50 was 8.3%.)

So am I thinking correctly that when it comes to whether one has 5% in REITs or not, or 5% in SCV or not, within in a 60/40 portfolio, the impact on returns will be minimal. If the difference between 60/40 and 40/60 is "only" 0.9%, then it probably won't matter much what kind of tilts you might have within a 60/40 AA?
CV
 

Re: Difference between 60/40 and 40/60

Postby BolderBoy » Tue Oct 01, 2013 9:37 am

CV wrote:According to Vanguard's portfolio asset allocation tool, a 60/40 AA has had (in the past, and I know that doesn't mean much going forward) an average return of 8.7%, and a 40/60 AA has had an average return of 7.8% (50/50 was 8.3%.)

So am I thinking correctly that when it comes to whether one has 5% in REITs or not, or 5% in SCV or not, within in a 60/40 portfolio, the impact on returns will be minimal. If the difference between 60/40 and 40/60 is "only" 0.9%, then it probably won't matter much what kind of tilts you might have within a 60/40 AA?

Total Stock Market Index contains some REIT already. If you skew that value by adding more, then you begin to leave the 60/40 - 40/60 model upon which the VG study was based, so the return percentages may change a bit.

But, "in general" what you are saying is probably correct. Keep it simple.
BolderBoy
 
Posts: 914
Joined: Wed Apr 07, 2010 1:16 pm
Location: Colorado

Re: Difference between 60/40 and 40/60

Postby Sidney » Tue Oct 01, 2013 9:41 am

5% slices don't really move the needle much.
I always wanted to be a procrastinator.
Sidney
 
Posts: 5700
Joined: Thu Mar 08, 2007 7:06 pm

Re: Difference between 60/40 and 40/60

Postby jimkinny » Tue Oct 01, 2013 12:50 pm

I eventually came to the same conclusion you have made. It does not seem to matter a lot, over the long term. What I also did not realize initially is that the reward for the risk taken, may not show up for a very long time.


jim
jimkinny
 
Posts: 1060
Joined: Sun Mar 14, 2010 2:51 pm

Re: Difference between 60/40 and 40/60

Postby CV » Tue Oct 01, 2013 12:56 pm

Thanks, all.

I just exchanged my REIT fund into my S-T bond fund. Now I have a slightly more simple portfolio. I'd like to sell my Small Cap Value and Large Value and put them into my Total Stk Market, but I'd get whacked with taxes. Simplicity has its limits.
CV
 

Re: Difference between 60/40 and 40/60

Postby Prokofiev » Tue Oct 01, 2013 1:04 pm

CV wrote:If the difference between 60/40 and 40/60 is "only" 0.9%, then it probably won't matter much what kind of tilts you might have within a 60/40 AA?


Why do you think .9% is "only .9%" and very small?

Think of it this way . . .

Over the past 35 years the CPI has averaged 3.6%. So the real RORs are 5.1% and 4.2%. That means the 60/40 portfolio returned over 21% more in real $ every year than the 40/60.
Over a lifetime of investing, a .9% real difference is very large. And with todays real bond rates of -1% to maybe 1.5%, a .9% difference over 30-40 years is even greater.
Everything should be made as simple as possible, but not simpler - Einstein
User avatar
Prokofiev
 
Posts: 907
Joined: Mon Feb 19, 2007 10:45 pm
Location: New Orleans

Re: Difference between 60/40 and 40/60

Postby KyleAAA » Tue Oct 01, 2013 1:10 pm

I think if you're going to tilt, you might as well go big. Like you said a 5-10% tilt to small value and/or REITs probably isn't going to make a huge difference. That's why I tilt a full 50% of my equities towards small-value and hold 10% of my total portfolio in REITs. If you're hedging your bets to the point of limiting your SV exposure to 5%, it's probably not even worth the trouble. Either you believe in slice n' dice or you don't.
KyleAAA
 
Posts: 5393
Joined: Wed Jul 01, 2009 6:35 pm

Re: Difference between 60/40 and 40/60

Postby DiscoBunny1979 » Tue Oct 01, 2013 1:22 pm

CV wrote:According to Vanguard's portfolio asset allocation tool, a 60/40 AA has had (in the past, and I know that doesn't mean much going forward) an average return of 8.7%, and a 40/60 AA has had an average return of 7.8% (50/50 was 8.3%.)

So am I thinking correctly that when it comes to whether one has 5% in REITs or not, or 5% in SCV or not, within in a 60/40 portfolio, the impact on returns will be minimal. If the difference between 60/40 and 40/60 is "only" 0.9%, then it probably won't matter much what kind of tilts you might have within a 60/40 AA?


0.9% is a small difference? Please use the rule of 72 . . .

at 7.8% money doubles every 9.23 years
at 8.7% money doubles every 8.27 years

I don't believe in tilting because the only thing one needs to determine is what kind of annualized yearly expected return you want and just use low cost fund(s) that will hopefully in the long term provide those returns. If you can afford to wait for money to double every 10 years, use a 40/60 allocation. If you need money to double at a faster clip, choose a 60/40. However, going forward, those average yearly returns might be misleading (don't use the past to project into the future - past returns might not be indicative of future results).
User avatar
DiscoBunny1979
 
Posts: 1953
Joined: Sun Oct 21, 2007 11:59 am

Re: Difference between 60/40 and 40/60

Postby parsi1 » Tue Oct 01, 2013 2:31 pm

CV wrote:According to Vanguard's portfolio asset allocation tool, a 60/40 AA has had (in the past, and I know that doesn't mean much going forward) an average return of 8.7%, and a 40/60 AA has had an average return of 7.8% (50/50 was 8.3%.)

So am I thinking correctly that when it comes to whether one has 5% in REITs or not, or 5% in SCV or not, within in a 60/40 portfolio, the impact on returns will be minimal. If the difference between 60/40 and 40/60 is "only" 0.9%, then it probably won't matter much what kind of tilts you might have within a 60/40 AA?


The difference of $100,000 invested over 30 years with 8.7% return vs 7.8% is $269,642.
User avatar
parsi1
 
Posts: 93
Joined: Tue May 29, 2012 9:03 am

Re: Difference between 60/40 and 40/60

Postby Boglenaut » Tue Oct 01, 2013 2:37 pm

Sidney wrote:5% slices don't really move the needle much.


I'd say 5% of the difference. :happy
User avatar
Boglenaut
 
Posts: 2889
Joined: Mon Mar 23, 2009 8:41 pm

Re: Difference between 60/40 and 40/60

Postby CV » Tue Oct 01, 2013 2:42 pm

Thanks much, all. Please bear in mind the the 60/40 v 40/60 and the corresponding 0.9% difference in past returns wasn't really the question. My thinking was that a 5% REIT tilt would likely yield less than the difference between 60/40 and 40/60. So now I'm 60/40, no tilt towards REITS, and hoping for a 3% return going forward. Who knows?
CV
 

Re: Difference between 60/40 and 40/60

Postby Prokofiev » Tue Oct 01, 2013 6:48 pm

CV wrote:Please bear in mind the the 60/40 v 40/60 and the corresponding 0.9% difference in past returns wasn't really the question.


OK. But you decided to call the initial post "Difference between 60/40 and 40/60" and noted, then discussed the difference - concluding there wasn't much difference. That is what we are objecting to.

Had you called it "5% REIT or 5% TSM?" we would have gotten to the truth much faster!
Everything should be made as simple as possible, but not simpler - Einstein
User avatar
Prokofiev
 
Posts: 907
Joined: Mon Feb 19, 2007 10:45 pm
Location: New Orleans

Re: Difference between 60/40 and 40/60

Postby CV » Tue Oct 01, 2013 6:56 pm

Prokflev, I agree that it was mistitled. I guess I started out thinking that if the difference between the 60/40 and the 40/60 was .9%, then the difference between 5% in REITs versus something else would be smaller. All of the posters helped on this.
CV
 

Re: Difference between 60/40 and 40/60

Postby berntson » Tue Oct 01, 2013 7:04 pm

This link may be helpful. It gives historic returns for various tilting levels for 50/50, 75/25, and 100/0 stock-bond portfolios.

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=93095

A strongly tilted (sml=.4 and hml=.4) 50/50 portfolio had slightly higher historic returns than a non-tilted 75/25 portfolio. So tilts can make a big difference. But that's also a really big tilt. Suppose that 25% of your portfolio (half of your equities) are split equally between small value and large value. That probably would give you somewhere around a smb=.2 and hml=.2 tilt. That would bump up your historical returns by about .8%. Of course, things could be different going forward.
User avatar
berntson
 
Posts: 1326
Joined: Mon Oct 29, 2012 1:10 pm

Re: Difference between 60/40 and 40/60

Postby john94549 » Tue Oct 01, 2013 9:42 pm

My wife and I defaulted to 60/40 for ever so many years, then only began to "lighten up" on equities as we neared retirement. We are now roughly 40/60 (age 66), up from 35/65 due to a rather nice stock market performance this year.

The real issue for retirees or near-retirees is whether to slavishly obey "age-in-bonds", opt for a "floor" at some percentage of equities, or choose another path.

To re-balance back to 35/65 at this time (we normally re-balance in February) would mandate the purchase of fixed-income products of little appeal.
john94549
 
Posts: 2707
Joined: Tue Jul 26, 2011 9:50 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: busdriver, fabdog, Ganacel, grap0013, GuyFromGeorgia, IPA Guy, jsl11, retiredjg, rob, Taylor Larimore and 47 guests